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Article
Publication date: 1 November 2006

Catherine M. Dalton and Dan R. Dalton

Looks at increasing number of related party transactions despite regulatory scrutiny.

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Abstract

Purpose

Looks at increasing number of related party transactions despite regulatory scrutiny.

Findings

Although related party transactions per se are not illegal or underhanded, they have the potential to raise red flags more readily than other transactions.

Practical implications

Provides executives with information on related party transactions and how to avoid impropriety.

Originality/value

Of particular value to CEOs and other board members

Details

Journal of Business Strategy, vol. 27 no. 6
Type: Research Article
ISSN: 0275-6668

Keywords

Book part
Publication date: 1 December 2009

Bikram Chatterjee, Monir Zaman Mir and Omar Al Farooque

Purpose – This study investigates the status of related party disclosure in an emerging economy, that is, India. The reason behind concentrating on India is due to its opening of…

Abstract

Purpose – This study investigates the status of related party disclosure in an emerging economy, that is, India. The reason behind concentrating on India is due to its opening of the economy in 1991 to attract foreign investment. Hence, it is significant that investors are provided with credible information. The accounting value of ‘secrecy’ underlying India and the voluntary nature of detailed reporting about related parties in this country further motivated the present study.

Methodology/Approach – The research method includes a content analysis of the ‘related party disclosure’ section of annual reports of a sample of Indian companies for the financial years 2002–2006.

Findings – Indian companies disclosed more than the required minimum level of related party disclosure as required in the Indian accounting standard. No association between related party disclosure with market capitalization, industry affiliation and foreign listing was found for the year 2006. However, when the scores of all the five years 2002–2006 were considered manufacturing and automotive companies disclosed more about related parties than diversified, service and technology.

Research Limitations – The limitations of our findings rests upon the fact that we have not examined the effect of factors such as the composition of management of each company and the presence of Indians/Non-Indians in management.

Originality/Value of the Paper – Most studies exploring disclosure practices are directed towards developed countries. The disclosure practices in developing countries is an under researched area. This paper contributes towards the existing literature by taking the case of an emerging economy, that is, India.

Details

Accounting in Emerging Economies
Type: Book
ISBN: 978-1-84950-626-7

Article
Publication date: 9 August 2011

Mehdi Nekhili and Moêz Cherif

The purpose of this article is to study the impact of the related parties' transactions (RPTs) on firm value, and to identify the ownership and governance characteristics of…

2397

Abstract

Purpose

The purpose of this article is to study the impact of the related parties' transactions (RPTs) on firm value, and to identify the ownership and governance characteristics of companies that engage in this type of transactions.

Design/methodology/approach

The paper uses 3SLS simultaneous model carried out on a sample of 85 companies listed on the Paris Stock Exchange during the period 2002‐2005.

Findings

The results show that RPTs are mainly influenced by the voting rights held by the main shareholder, the size of the board of directors, the degree of independence enjoyed by the audit committee and the board of directors, the choice of external auditor, the debt ratio and the fact of being listed in the USA. Mainly the transactions carried out directly with the main shareholders, directors and/or managers that have a negative influence on firm value.

Research limitations/implications

In future studies, it will be interesting to test the impact of the level of expertise as well as the level of qualification in the field of accounting and finance of the members of the French audit committees on the frequency of RPTs.

Originality/value

The current research complements prior studies on the RPT by showing that the frequency of RPTs can be damaging to companies and can destroy their market value.

Details

Review of Accounting and Finance, vol. 10 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Book part
Publication date: 19 April 2011

Effiezal Aswadi Abdul Wahab, Hasnah Haron, Char Lee Lok and Sofri Yahya

This chapter investigates the relationship between related party transactions (RPTs), corporate governance, and firm performance. Specifically, this chapters examines the…

Abstract

This chapter investigates the relationship between related party transactions (RPTs), corporate governance, and firm performance. Specifically, this chapters examines the moderating effect of corporate governance on the RPTs–performance relationship. On the basis of 448 firm-year sample for 2005–2007, we find evidence that related transactions are detrimental to shareholders and thus reducing firm performance. However, the negative effect is mitigated with the presence of good governance, namely level of board independence and executive remuneration. Furthermore, we find auditor size as an external governance mechanism could also reduce the negative impact of RPTs.

Details

International Corporate Governance
Type: Book
ISBN: 978-0-85724-916-6

Keywords

Open Access
Article
Publication date: 16 June 2021

Trisninik Ratih Wulandari and Doddy Setiawan

This study aims to examine the effect of ownership concentration and foreign ownership on tunneling activities in Indonesia.

2309

Abstract

Purpose

This study aims to examine the effect of ownership concentration and foreign ownership on tunneling activities in Indonesia.

Design/methodology/approach

The population in this study were manufacturing companies listed on the Indonesian Stock Exchange from 2014 to 2018. The total observations used in this study were 557 observations. This study used three measurements to assess tunneling activities in a company, namely, related party receivables (TUL1), related party payables (TUL2) and related party receivables-payables (TUL3).

Findings

The results of this study indicated that ownership concentration and foreign ownership had a negative effect on tunneling activity of TUL1. Meanwhile, the effect of ownership concentration and foreign ownership on TUL2 and TUL3 showed a positive effect. This indicated that manufacturing companies in Indonesia preferred to carry out tunneling activities through related party payables compared with related party receivables. Foreign ownership was also effective in controlling the company’s tunneling activities when the company conducted tunneling transactions of related party receivables. Small companies and companies with positive return on assets were more susceptible to tunneling activities carried out by the companies.

Practical implications

The results of this study can be used as a consideration for investors in making decisions by looking at tunneling activities carried out by companies in Indonesia.

Originality/value

To the best of the authors’ knowledge, no previous study in the tunneling literature has compared the results of the effect of the concentration of foreign ownership and ownership on tunneling using three measurements at once. This is useful to see the company’s behavior of tunneling activities from a different perspective.

Details

Rajagiri Management Journal, vol. 17 no. 1
Type: Research Article
ISSN: 0972-9968

Keywords

Article
Publication date: 17 July 2020

Gustavo Cesário, Ricardo Lopes Cardoso and Renato Santos Aranha

This paper aims to analyse how the supreme audit institution (SAI) monitors related party transactions (RPTs) in the Brazilian public sector. It considers definitions and…

Abstract

Purpose

This paper aims to analyse how the supreme audit institution (SAI) monitors related party transactions (RPTs) in the Brazilian public sector. It considers definitions and disclosure policies of RPTs by international accounting and auditing standards and their evolution since 1980.

Design/methodology/approach

Based on archival research on international standards and using an interpretive approach, the authors investigated definitions and disclosure policies. Using a topic model based on latent Dirichlet allocation, the authors performed a content analysis on over 59,000 SAI decisions to assess how the SAI monitors RPTs.

Findings

The SAI investigates nepotism (a kind of RPT) and conflicts of interest up to eight times more frequently than related parties. Brazilian laws prevent nepotism and conflicts of interest, but not RPTs in general. Indeed, Brazilian public-sector accounting standards have not converged towards IPSAS 20, and ISSAI 1550 does not adjust auditing procedures to suit the public sector.

Research limitations/implications

The SAI follows a legalistic auditing approach, indicating a need for regulation of related public-sector parties to improve surveillance. In addition to Brazil, other code law countries might face similar circumstances.

Originality/value

Public-sector RPTs are an under-investigated field, calling for attention by academics and standard-setters. Text mining and latent Dirichlet allocation, while mature techniques, are underexplored in accounting and auditing studies. Additionally, the Python script created to analyse the audit reports is available at Mendeley Data and may be used to perform similar analyses with minor adaptations.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 32 no. 4
Type: Research Article
ISSN: 1096-3367

Keywords

Article
Publication date: 28 January 2014

Emiliano Di Carlo

Under IAS 24 a related party transaction (RPT) is a “transfer of resources, services or obligations between related parties, regardless of whether a price is charged” (IASB). The

1679

Abstract

Purpose

Under IAS 24 a related party transaction (RPT) is a “transfer of resources, services or obligations between related parties, regardless of whether a price is charged” (IASB). The purpose of this paper is to consider the interest of the business group and the directing activity of the parent company for the interpretation of the RPT. Considering the interest of the group means to interpret the intra-group transactions not as isolated transactions, as usually done by the empirical studies, but in a wider perspective, that of the group.

Design/methodology/approach

This paper builds on explanatory multiple case studies in order to answer the following research questions: why the interest of the business group and the directing activity of the subsidiaries by the parent company are important in the interpretation of RPTs. How RPTs can be interpreted in the light of the directing activity of the holding company.

Findings

Dominant shareholder tends to demonstrate that the group it is not managed as a single economic entity and sometimes that subsidiaries are not really controlled. The case studies show that a regulation that imposes the transparency of the directing activity has at least two effects: the controlling shareholder finds it convenient to delegate the decision-making power and to not carry out RPTs among firms that do not present clear economic links. Thus, the transparency of the directing activity seems to be a disincentive to the establishment of a pyramidal group with expropriation purposes.

Research limitations/implications

It is appropriate that the interpretation of the RPT take into account not only the disclosure of the RPT (e.g. type and nature), but also the following disclosure: the reason and the business purpose that lead to RPT; the interest of the company in engaging such transactions; and the procedures for their approval. The independence of subsidiaries directors is necessary to ensure the management autonomy of the boards, and in the case of directing activity they have to protect outsiders in the case of detrimental transactions ordered by the controlling and directing company that are not carried out in the interest of the group.

Originality/value

Unlike what has been done so far by the literature on RPT, this paper considers the interest of the group to interpret the intra-group transactions and the separation between control and direction. It means do not interpret RPT as isolated transactions, as usually done by the empirical studies, but in a wider perspective, that of the group.

Details

Corporate Governance, vol. 14 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 10 March 2022

Sana Ben Cheikh and Nadia Loukil

The purpose of this paper is to examine the effect of the presence of political connections on firm performance through related party transactions in Tunisia, a country where that…

Abstract

Purpose

The purpose of this paper is to examine the effect of the presence of political connections on firm performance through related party transactions in Tunisia, a country where that is characterized by the Jasmin revolution in 2011.

Design/methodology/approach

The study uses a sample of nonfinancial firms between 2008 and 2014 listed on the Tunis Stock Exchange and uses generalized least squares on panel data.

Findings

First, the political connection and related parties' transaction enhances firm's market performance. Second, the study reveals that political connection moderates the relationship between the related party transactions and firm performance only in the period after revolution. Indeed, politicians seem to have used related party transactions to expropriate firms in a period of political instability. Finally, we show that politicians are more attracted by firms with higher market performance and with higher number of related parties' transactions.

Practical implications

The empirical findings contribute to the current debate on the benefits and costs of political connections in emerging economies. It shows that political connections enhance market valuation of firms. However, political connection costs appear during political instability period.

Originality/value

This study addresses the interaction between related party transactions, political connections and firm performance. It is the first study to test if the related party transactions are used as a tool by politicians to expropriate firms.

Details

Journal of Accounting in Emerging Economies, vol. 13 no. 1
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 30 October 2018

Moataz El-Helaly

Several studies, especially in Asian economies, have investigated the antecedents, implications and consequences of related-party transactions (RPTs). This paper aims to review…

1756

Abstract

Purpose

Several studies, especially in Asian economies, have investigated the antecedents, implications and consequences of related-party transactions (RPTs). This paper aims to review this literature to collate, gauge and critically discuss understandings of the relationship between RPTs and risk, with a particular focus on audit risk.

Design/methodology/approach

The paper discusses RPTs and how they have been associated with corporate scandals and the expropriation of shareholders’ wealth. RPTs are defined as per accounting standards and the main types of RPTs are described based on the extant literature. Two key research design issues are discussed: measures used to operationalize RPTs and observable variations in sample size across RPT studies. Evidence is presented on the negative effects of RPTs and the role of regulation, corporate governance and auditing in reducing risks.

Findings

Prior studies have associated RPTs with the expropriation of shareholders’ wealth, declining firm valuations, lower-quality financial reporting, increased risk of material misstatements and decreases in long-term firm performance. Further, the evidence suggests that regulation, corporate governance and auditing can mitigate the negative effects of RPTs.

Practical implications

This paper provides insights for regulators on the effects of enforcement, corporate governance and external audits on reducing the negative effects of RPTs, and highlights the increased risk of material misstatements in financial statements when RPTs are conducted. Moreover, it reveals how RPTs affect risk assessments for auditors.

Originality/value

This paper represents the first comprehensive review of the empirical RPT literature. It provides a starting point for future investigations of RPTs, not least because it reveals important limitations with the extant body of research in this domain. It also offers salient insights and implications for practitioners and policy makers.

Details

Managerial Auditing Journal, vol. 33 no. 8/9
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 2 September 2019

Ahmed A. Diab, Ahmed Aboud and Arafat Hamdy

The purpose of this study is to address the impact of the related party transactions (RPTs) on firm value. The authors bring evidence from a usually ignored empirical setting: an…

Abstract

Purpose

The purpose of this study is to address the impact of the related party transactions (RPTs) on firm value. The authors bring evidence from a usually ignored empirical setting: an African emerging market.

Design/methodology/approach

In particular, the authors focus on companies listed on the Egyptian stock market using a sample of EGX 30 from 2012 to 2017.

Findings

Unlike the literature, the authors find no significant relationship between RPTs and market value.

Practical implications

This research provides insights for policymakers and other interested parties concerning the perception of RPTs in Egypt.

Originality/value

The reported different findings of this study assure the intermediary role of the context and the local culture in the relationship between RPTs and firm value, in contrast to the negative view that is mostly reported in the literature.

Details

Journal of Financial Reporting and Accounting, vol. 17 no. 3
Type: Research Article
ISSN: 1985-2517

Keywords

11 – 20 of over 35000